02024cam a22002657 4500001000600000003000500006005001700011008004100028100002400069245009400093260006600187490004100253500001900294520086800313530006101181538007201242538003601314690005701350690013701407700002301544710004201567830007601609856003701685856003601722w7431NBER20150331170940.0150331s1999 mau||||fs|||| 000 0 eng d1 aDiamond, Douglas W.12aA Theory of Bank Capitalh[electronic resource] /cDouglas W. Diamond, Raghuram G. Rajan. aCambridge, Mass.bNational Bureau of Economic Researchc1999.1 aNBER working paper seriesvno. w7431 aDecember 1999.3 aBanks can create liquidity because their deposits are fragile and prone to runs. Increased uncertainty can make deposits excessively fragile in which case there is a role for outside bank capital. Greater bank capital reduces liquidity creation by the bank but enables the bank to survive more often and avoid distress. A more subtle effect is that banks with different amounts of capital extract different amounts of repayment from borrowers. The optimal bank capital structure trades off the effects of bank capital on liquidity creation, the expected costs of bank distress, and the ease of forcing borrower repayment. The model can account for phenomena such as the decline in average bank capital in the United States over the last two centuries. It points to overlooked side-effects of policies such as regulatory capital requirements and deposit insurance. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aG20 - General2Journal of Economic Literature class. 7aG21 - Banks • Depository Institutions • Micro Finance Institutions • Mortgages2Journal of Economic Literature class.1 aRajan, Raghuram G.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w7431.4 uhttp://www.nber.org/papers/w743141uhttp://dx.doi.org/10.3386/w7431